Quiz 5 Flashcards
Characteristics of a Sole Proprietorship
-owner is the business
- get all profits
- fewer legal formalities
- only pays personal income taxes on business profits
- Personal assets at risk (unlimited liability)
- business dies with owner
- limited ability to raise money
Characteristics of a partnership
-States treat a partnership as a separate legal entity that sue and be sued
-Tax law treats it as a pass-through entity
(Partnership itself doesn’t pay the taxes, partners do)
Partnership by Estoppel
Occurs when a third person has harmfully/reasonably relied on representation by a partner that a non-partner was part of a relationship
Non-partner’s action binding on the partnership
General vs Limited Partners
General: informal
-no written agreement needed
Limited: at least one general and one limited partner
- not the same as an LLC, limits the liability of some of its owners
- in a LP, general partner fully responsible, limited contributes only cash/property (not involved in management, not liable)
Characteristics of an LLC
Hybrid
- Combines the limited liability of a corporation and tax advantages of a partnership
- Owners shielded from personal liability but can still lose the capitol they invested
- Governed by state law (LLC statutes vary from state to state)
- LLC is a legal entity separate from its owners
Advantages and Disadvantages of an LLC
Advantages
-Limited liability
- Flexibility in taxation
- Flexibility in management
Disadvantages
-Non uniform state laws
-Costs more $
Characteristics of an LLP
Hybrid
-Mainly for professionals
(who normally do business as partners in a partnership)
-PROFESSIONALS CAN’T SET UP LLCs
Liability: Sole Proprietors
Owner has unlimited personal liability
Liability: General Partners
In a LP, general partners are fully liable
Liability: limited partners
In a LP, limited partners aren’t personally liable for debts beyond what they invested into the company
Liability: partners in a partnership
-Partners are personally liable for the debts of the partnership
(Basically unlimited liability)
-New partner not liable for prior obligations
Liability: Members of LLCs
Shielded from personal liability but can still lose invested capitol
Liability: members of LLPs
- Professionals can avoid personal liability for malpractice of other partners
- Unlike an LLC, a partner in an LLP is still liable for their own actions
- LLP partner who supervised another is also liable
Liability: corporate shareholders
-Not personally liable unless corporate veil is pierced
Liability: Corporate Officers
- These are employees hired by directors
- Responsible for daily management
- Can go to jail for actions
- Corporations are liable for crimes committed by employees
Liability: Corporate directors
-Elected by shareholders, same liability as officers
Franchise agreement and relationship between Franchisee and Franchisor
Franchise Agreement: a Franchisor (owner of trademark, etc) licenses a franchisee to use the trademark in selling their goods
-Agreement’s basically a contract setting out conditions
- Franchisee pays for the license
- Franchisor receives a % of sales done
- Franchisor determines the territory to be served
- Franchisee handles daily operations
Duty of Care vs Duty of Loyalty
Duty of Care: partner can’t act negligently
Duty of Loyalty: Don’t compete with the partnership, profits derived by partner in conducting the business remains with the business
Piercing the corporate veil
-Occurs when a single-shareholder corporation and personal/corporate assets are mixed
(Corporation has no separate identity)
-Occurs when corporate formalities aren’t observed
Corporation by Estoppel
If a business acts like a corporation, it can’t avoid liability by claiming it’s not one
Jurisdiction for a sole proprietorship
Not a separate legal entity, jurisdiction is same as it is for a regular person
Jurisdiction for a corporation
Deemed a citizen in the state in which its incorporated and in the state where its principal place of business is
Jurisdiction for a partnership
Deemed a citizen of every state in which its partners reside
Applies to LLCs and LLPs
How LLCs are Managed and Taxed
Managed
-member managed
Taxed
- 2+ members taxed as a partnership (pass-through)
- 1 members taxed as a sole proprietorship
Duties of corporate shareholders, officers and directors
Duty of Care
- act honestly
- exercise normal care
- do what’s in the best interest of the company
- stay informed when making decisions
- supervise officers and employees (for directors)
Duty of Loyalty
- subordination of personal interests
- no competition
- no taking corporate opportunities
- no insider trading
- don’t do anything detrimental to minority shareholders
- no selling control of corporation
- no conflicts of interest
Public corporations
Formed by the government for some public purpose (postal service)
Private corporations
Created either entirely or partly for private benefit or for profit
Nonprofit corporations
Created for purposes other than making a profit (colleges)
Close corporations
- Shares held by few people
- operated like a partnership
- management like a sole proprietorship or partnership
- can restrict transfer of shares
S corporations
-Close corporations that meet requirements allowing it to be taxed as a partnership
Requirements:
- corporation is domestic
- fewer than 100 shareholders
- only one class of stock
- no shareholder is a nonresident alien
-avoids federal “double taxation”
(Income taxed to shareholders as personal income)
Domestic corporation
Formed in one state and does business in that state
Foreign corporation
Formed in one state and does business in another state
Alien corporation
Formed in another country and does business in the US
